Mortgages

It is a fascinating study of human behaviour that to save a dollar, consumers will shop around, haggle, use coupons and go to other measures over and above to stretch our hard earned income.

Conversely, with much larger financial burdens, like say the mortgage on their house, we, for the most part are complacent and take what our bank offers us.

As someone who is surrounded by this every day I see two main groups of Bank mortgage customers.

Those who aren’t educated in the process and are unaware that they might not be getting the best mortgage product to fit their needs.

The other group is those whose loyalty to the bank renders them unwilling to admit that they might not be getting the best mortgage product to fit their needs.

In both cases the bank comes out on top. They always do.

A short time ago the Bank of Canada  released an excellent research paper on Mortgages that examined how Canadians are able to get the best rate on their mortgage.

What the paper found was that the interest rate you receive from your bank is tied to your perceived value as a client, how many other products can they sell you, whether or not you are likely to negotiate your rate at renewal etc.

Below are several interesting facts that illustrate how your Bank views you as a customer and why you might not be getting the best rate possible.

1. People who use mortgage brokers obtain lower rates

• Mortgage Brokers gather multiple rate quotes and statistics show that those with multiple rate quotes pay the lowest rates.
• On average, using a mortgage broker will reduce your rate by 17.5 basis points, or 1.75%.  That works out to $832 in savings over 5 years for every $100,000 in mortgage!

2.  People who gather multiple rate quotes obtain lower rates

• Irrespectively of their characteristics or the characteristics of the local market, informed consumers will always receive a good rate from the lender.
• Branch managers try to screen consumers based on their search costs, their valuation for their services, and their observable characteristics, and then evaluate the profitability of signing particular borrowers to mortgage contracts. Branch managers have an incentive to offer larger discounts to consumers who have gathered, or have the potential to gather, multiple rate quotes, and to those that are, or will be more profitable to the bank. On the other hand, negotiating larger discounts is costly for the bank and can reduce the commissions earned by branch employees.

3. People with large mortgage amounts and new clients obtain lower rates

• Financial institutions may have an incentive to lock-in borrowers since few negotiate the renewal of their mortgage. This tendency provides lenders with an incentive to attract consumers with larger loans who have large outstanding balances at the time of renewal. Similarly, younger consumers and first-time home buyers are likely to be more profitable in the long-term for lenders.”
• Lenders know that you probably wont think twice when your renewal comes up so giving you a low rate now is an acceptable risk knowing that they can really sink their hooks in when you come up for renewal.

4. People who have large non-mortgage business with the bank obtain lower rates

• Branch managers have an incentive to offer larger discounts to consumers…that are, or will be, more profitable to the bank.
• This comes down to cross selling. Discounting your mortgage rate is fine if you will take out lines of credit and credit cards with that bank anyways.

Independent Mortgage Brokers like myself only deal in mortgages. We live and die by our service to our clients.

We offer EVERY client the lowest rate available up front. There is no haggling and our services are free to you.

So next time you are reviewing your mortgage with your bank make sure you are informed and aware, because saving $5 at the grocery store is great but saving $5000 in interest on your mortgage over a few years is a lot better.

John Shearer

Mortgage Broker
John.Shearer@verico.ca
(905) 320-2247
OntarioMortgageDeals.com
MyNewMortgage.ca